Mid-Cap Stocks: Asset Class with an Identity Crisis

Much like the middle child, mid-cap stocks have long struggled to find their identity. Carved out from the upper echelons of the small caps and the lower end of the large caps, the mid-cap sector has a rough definition of stock with a market capitalization of greater than $2 billion, but less than $10 billion. Taking components from both worlds, some analysts argue that mid-cap stocks can offer growth opportunities found in the small caps and the relative stability found in the large caps.

Within this rationale lies the argument for participation in mid-cap investing. Unlike the small caps that have not yet been seasoned by the market, nor like the large caps that have most of their growth behind them, there are those who claim that mid caps are in the “sweet spot” of the economy. You might say that they have survived the rigors of childhood and are now ready for their years of growth and maturity into adulthood.

Still other analysts point out that this area is ripe for merger and acquisition targets. With premiums often being paid on the acquired stocks value, an opportunity presents itself for the investor looking for a little “extra.”

There are literally hundreds of mid-cap stocks and, while some languish in obscurity, a number have widely recognized names. Abercrombie & Fitch, Circuit City, AutoZone, Marriott International, and Newell Rubbermaid all fit this category. Because this range is often a stop over point for the large caps, it goes without saying that the real heavy weights of the investment world have also spend at least some time here.

A number of indexes track mid caps, with The Standard & Poors Mid Cap 400 and The Russell Midcap Index being two of the more popular. The S&P 400 Midcap is a weighted index like the S&P 500, except that it covers the mid-cap sector of the U.S. stock market. The Russell Midcap Index currently has a weighted average market cap of $7.5 billion and includes the smallest 800 stocks in the Russell 1000.

The Steele Mutual Fund Expert database contains about 1,200 funds within its mid-cap categories, although less than 220 have track records of 10 years or more and less than 50 have been around for at least 20 years. The vast majority of funds that adhere to the mid-cap style are actively managed funds. For investors who follow an index approach, they wont find as many choices compared to the large-cap index funds, but the number is growing.

In recent years, mid-cap funds have started to receive substantial attention in the financial press. Using Steele Mutual Fund Expert as our source, they have come out from under the shadow of their bigger sibling, large cap funds, and turned in better returns. For the three years from1/1/ 2002 through 12/31/2004, the 162 funds in the mid-cap blend averaged 9.40% and beat the 853 funds in the large-cap blend, which averaged 2.91%. Importantly, the mid caps did this with only slightly greater standard deviation. The 228 funds in the small-cap blend averaged 11.65% and boasted the best track record for this period, but had greater volatility. While these results are not guaranteed in the future, they have helped the mid caps establish themselves as a formidable asset class.

So, for those looking for a palatable mix between large caps and small caps, the mid- cap sector deserves serious consideration.

Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him by going directly to the Living Trust Network web site located at

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